Responses of China’s shadow banking system to exogenous shocks

ABSTRACT

The rapid expansion of China’s shadow banking system in recent years has led to continuous accumulation of risks and posed threats to the security of China’s real economy. According to the specific mechanism of China’s economic operation, this paper constructs a dynamic stochastic general equilibrium model to analyse the responses of China’s shadow banking system to the exogenous shocks of benchmark interest rate adjustment, high-risk enterprise return rate fluctuation and shadow bank return rate fluctuation. Results indicate that (1) the shadow bank loan interest rate reacts intensively to the benchmark interest rate adjustment; (2) the shadow bank loan interest rate has immediate and short-term response to the fluctuation of high-risk enterprise return rate; (3) the fluctuation of shadow bank return rate indirectly affects the shadow bank loan interest rate. An empirical study using the time-varying VAR model provides further empirical evidence. The shadow banking risks caused by the impacts on the shadow bank loan interest would increase the fragility of China’s financial system and endanger the security of China’s real economy.

KEYWORDS:

• Shadow banking system
• exogenous shocks
• dsge model
• china

JEL CLASSIFICATION:

• G10
• P34
• C61

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 China’s shadow banking business mainly consists of wealth management products and entrusted loans, which are basically operated by commercial banks. Therefore, China’s shadow banking system requires almost no additional labor and is considered to have no labor demand in our study. The functions of the PBOC have been properly simplified, thus the PBOC is considered to have no labor demand in our study.

2 In 2012, the illegal sales of wealth management products by some commercial banks many banks have made the problem of shadow banking begin to be highly valued by regulators. Therefore, the sampling period starts in 2013, although the concept of shadow banking was first introduced due to the 2008 global financial crisis..

Additional information

Funding

This work was supported by the National Social Science Foundation of China [14BGL031]; Humanities and Social Sciences Project of Ministry of Education in China [17YJC790063].